Saving & Investment – Most of you might be familiar with these two terms but all of you might not be aware of the difference between these two simple terms.
Further Reading: How to Invest in Mutual Funds
Are you also among those who use these two terms interchangeably and thinking that they are investing while they are only saving?
Well, there is a very thin line of difference between the two. Saving is that part of our income which we do not use for present consumption and earmark it for some future purpose.
While in investment, we direct a certain portion of our income towards buying an asset class on which we expect to earn returns.
Let me explain this difference with the help of an example. Suppose you are getting a monthly income of say Rs 30,000 and you want to achieve a certain financial goal.
After taking into consideration your monthly expenses you usually left with Rs 5000 p.m. Now if you would let these Rs 5000 lie in your bank account then it would be considered as savings while on the other hand if you use these savings towards buying any asset class like equity, debt, traditional saving instruments, etc then it would be termed as an investment.
Now I hope that you all have understood the difference between these two terms and now I would like to throw some light on the important aspects which one should keep in his mind before investing.
KNOW YOUR INVESTMENT GOALS
Moving on a path without knowing where it will take you will result in wastage of both time and effort. In the same way, making investments without knowing your goals beforehand will not produce any fruitful results. For example, consider a situation where an individual intends to buy a home but he is not sure when he will actually buy it and also do not have any idea about its future cost. So in this case how can anyone decide the investment one should make?
Hence one should always know their financial goals before starting with the investments.
KNOW YOUR RISK APPETITE
You might have seen in articles or newspapers filled with statements like equity markets have made the investors rich, investors wealth swell by this much billion crores, etc which may persuade you to invest in equity markets. However, there is no second opinion that equity markets are the best asset class but one should always tread with care when taking exposure in equities. By care I mean that one should look at his risk appetite before taking exposure in risky asset classes.
Further Reading: Mutual Fund Sahi Hai
No one should chase returns without understanding one’s risk appetite; otherwise, you will only end up bringing mental stress for yourself and will regret your decision in the future, if things do not move in your favour.
KNOW YOUR LIQUIDITY REQUIREMENT FOR SAVING & INVESTMENT
Not all individuals have similar goals, and the time to achieve those goals also varies. The whole purpose of investing is to reach a required sum of money through which a person can fulfill his or her goals. If that goal is not achieved on time then all the efforts will go in vain. Also, an investor should not overlook his liquidity needs if any other purpose is fulfilled. For example, a person should not invest in PPF just for saving taxes if his goal is 2-5 years away as there is a lock in period of 15 years and hence you would not be able to withdraw investments before that.
KNOW YOUR TIME HORIZON
The benefit of knowing your time horizon upfront will not only help you in choosing the right investment product but also ensure the availability of funds when needed. For example, an individual having a time horizon of just 2 years shall not allocate his funds towards equities in any case as markets can be very volatile in short term. However, if an investor has a time period of more than 3 years then one may consider investing in equities.
KNOW YOUR ASSET ALLOCATION FOR SAVING & INVESTMENT
If investing money would have been so easy then everyone would have become millionaires by now. But that is not the case. The thing which matters the most while investing is asset allocation. Asset allocation is nothing but the decision one has to make regarding the distribution of funds across various asset classes, like equity, debt, gold, etc. For example, a person in his 30’s can allocate around 60-70% in equities while the rest in debt and gold. Asset allocation is one of the key aspects which one should not be ignored as this can bring a huge difference to your wealth.
KNOW YOUR PRODUCT SUITE
Last but not the least aspect which should be taken care of while investing is knowing your product suite well. Let me explain you with the help of an example, why is it important. So, consider a situation where you need money after say 2 years but the money is not available to you because you have invested in ULIP’s without knowing of the fact that they have a minimum lock-in period of 5 years. The same can happen to you if you invest without knowing the product well.
Further Reading: OutLook India